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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 1995
CLARK REFINING & MARKETING, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-11392 43-1491230
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
8182 Maryland Avenue 63105-3721
St. Louis, Missouri (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including are code: (314) 854-9696
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Item 2. Acquisition of Assets
On February 27, 1995, Clark Refining & Marketing, Inc. (''Clark''), a wholly
-owned subsidiary of Clark USA, Inc. (''Clark USA'') completed the purchase of
Chevron U.S.A. Inc.'s (''Chevron'') Port Arthur, Texas refinery and certain
related terminals, pipelines and other assets (the ''Port Arthur Refinery'')
for approximately $70 million, plus approximately $138 million for inventory
and spare parts (the ''Acquisition''). Clark is also obligated under certain
circumstances to pay to Chevron contingent payments (the ''Chevron Contingent
Payments'') based on refining industry margin indicators and the volume of
product produced at the Port Arthur Refinery over a five-year period. Based on
the prevailing average refining industry margin indicators during 1993 and
1994, Clark would not have been obligated to make any Chevron Contingent
Payments had the Chevron Contingent Payments obligations been in place during
such periods. The maximum total amount of the Chevron Contingent Payments is
$125 million and the obligation expires on February 27, 2000.
The Acquisition more than doubled Clark s refining capacity, and provided
Clark with a sour crude oil refinery with a technical complexity rating in the
top third of all US Gulf Coast refineries. The refinery has the ability to
process 100% sour crude oil, including up to 20% heavy sour crude oil, and has
coking capability. The configuration of the Port Arthur Refinery complements
Clark's existing refineries with its ability to produce jet fuel, 100% low
sulfur diesel fuel, 55% summer Reformulated Gasoline (''RFG'') and 75% winter
RFG. The refinery's Texas Gulf Coast location provides access to numerous
cost-effective domestic and international crude oil sources, and its products
can be sold in the mid-continent and eastern United States as well as export
markets. Clark entered into agreements to sell to Chevron, at market prices,
40,000 barrels per day of gasoline and 6,500 barrels per day of low-sulfur
diesel and jet fuel for one year from the date of the Acquisition. Remaining
production will be used to supply Clark's current wholesale and retail needs
with the balance initially sold in the spot markets, while Clark further
develops its wholesale and retail networks. Clark believes that the Port
Arthur Refinery has the potential for significant productivity gains with
minimal capital investment, and that it will offer an opportunity for improved
results of operations and cash flow. Clark expects that the cash flow from the
Port Arthur Refinery will be sufficient to cover capital expenditures and any
potential Chevron Contingent Payments.
The Port Arthur Refinery was operated by Gulf Oil Corporation (''Gulf'')
prior to Chevron's acquisition of Gulf in 1984. Although the original refinery
on this site began operating in 1904, the refinery has been the subject of
substantial capital expenditures. Gulf invested approximately $400 million in
a major conversion to sour crude in 1980 1982 and Chevron invested
approximately $450 million from 1989 through 1994. Converted by Chevron from a
dual train to a single train operation in 1992 in order to achieve a
substantial reduction in operating costs, the refinery's rated crude oil design
capacity was reduced from what had previously been over 400,000 barrels per day
to approximately 178,500 barrels per day. In October 1994, Clark received an
air operational permit from the Texas Natural Resources Conservation Commission
(the ''TNRCC'') which provides that the refinery crude oil charge rate can be
increased to 250,000 barrels per day. Clark intends to operate the refinery at
approximately 200,000 barrels per day, subject to market conditions.
The Port Arthur Refinery consists of approximately 4,000 acres, of which
less than 100 acres are occupied by active operating units. These units
include a crude unit, catalytic reformer, fluid catalytic cracking unit,
hydrotreaters, cogeneration units, sulfur recovery units, gas recovery units,
an HF alkylation unit and delayed cokers. The average age of the operating
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units at the refinery is 16 years, which Clark believes is significantly below
the industry average.
The Purchase Agreement
The Acquisition provided for the purchase by Clark of Chevron's Port Arthur,
Texas refinery and certain related terminals, pipelines and other assets.
Clark also acquired legal title to Chevron's chemicals facility (the
''Chemicals Facility'') and lube oil distribution facility (the ''PADC
Facility''), which are integrated with the Port Arthur Refinery. The Chemicals
Facility and the PADC Facility were leased to and will be operated by Chevron
under long-term leases providing for a nominal rental and containing a purchase
option in favor of Chevron at a nominal purchase price. Clark also entered
into agreements with Chevron and its affiliates providing for, among other
things, the provision of various services and the sale and purchase of various
products and commodities. Some of these ancillary agreements may be material
to Clark.
The following summary of the purchase agreement and related agreements is
qualified in its entirety by reference to the applicable provisions of the
purchase agreement and the other agreements described below, copies of which
are publicly available from the U.S. Securities and Exchange (the
''Commission'').
Included Assets
The assets acquired by Clark include Chevron's Port Arthur refinery,
together with the affiliated Lucas crude oil storage terminal, the Fannett LPG
storage terminal, the Beaumont marketing terminal, Chevron's one-third interest
in the Port Arthur Products Station and certain pipelines related to these
interconnected facilities. Clark also acquired Chevron's inventories of crude
oil, other feedstocks and refined products and spare parts associated with the
Port Arthur Refinery. Chevron may exclude certain lube oil manufacturing
equipment from the sale for up to six months from the closing date, with a
corresponding reduction in the purchase price.
Leaseback Assets
Clark also acquired legal title to the Chemicals Facility, the PADC Facility
and certain related assets (collectively, the ''Leaseback Assets''). Clark has
leased the Chemicals Facility and the PADC Facility to Chevron under the leases
described below.
Purchase Price
The purchase price for the Port Arthur Refinery was approximately $70
million. Clark paid a deposit of $5 million upon execution of the purchase
agreement in August 1994 and an additional deposit of $5 million in February
1995, and paid the remaining amount at closing. If Chevron exercises its six
month option to exclude the lube oil manufacturing equipment from the sale,
Clark will be refunded $10 million.
Clark purchased all crude oil, other feedstocks and refined product
inventories in major pipelines and tanks, at formula prices based on market
prices for such items over a measurement period after the closing date. The
purchase price at closing for such inventory was approximately $130 million.
paid Chevron an amount equal to Chevron's cost of certain spare parts,
supplies, catalyst inventories and other non-hydrocarbon inventories, of
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approximately $8 million.
The purchase agreement provides for the Chevron Contingent Payments to
Chevron of up to $125 million over a five year period from the closing date of
the Acquisition in the event that refining industry margin indicators exceed
certain escalating levels. The Chevron Contingent Payments will be calculated
as follows: 50% of the volume of crude oil processed at the Port Arthur
Refinery multiplied by an Adjusted WTI 3/2/1 crack spread minus $3.00 per
barrel. The Adjusted WTI 3/2/1 crack spread is comprised of the sum of two
barrels of conventional non-reformulated unleaded gasoline plus one barrel of
0.2% high sulfur diesel (both priced at Platt's Low Pipeline Spot Gulf Coast)
minus three barrels of WTI (priced at Platt's Midland Low Gulf Coast), all
divided by three. The Adjusted WTI 3/2/1 crack spread is then converted into
1991 dollars by using the implicit deflator for Gross Domestic Product as
published in the ''Survey of Current Business'' issued by the U.S. Department
of Commerce. Any negative amount that is calculated will be carried forward to
the next year during the five-year contingent payment period. Clark believes
that even if such contingent payments are required to be made, they would not
have a material adverse effect on Clark's results of operations since Clark
would also benefit from half of the impact of such increased margins. Such
payments, if any, will be due on November 1 of each year from 1995 through
1999.
Employees
Clark has hired approximately 853 former Chevron employees. Substantially
all of the Chevron employees hired by Clark are represented by unions. Clark
did not assume Chevron's collective bargaining agreements with such unions, but
agreed to collective bargaining agreements with those unions which became
effective upon the closing under the purchase agreement.
Clark recognized service with Chevron for any Clark employee benefits to
which the new employees may became entitled. In addition to on-going cash
costs, this will also require Clark to accrue approximately $10-$15 million in
accumulated retiree medical liability for the new employees. Clark will also
pay two weeks of severance pay per year of service up to 35 years (including
service with Chevron) to any new employee it terminates without cause in the
first year after closing or who resigns as a result of a wage decrease or a job
transfer to a location more than 50 miles from the current location.
Environmental Matters
Under the purchase agreement, Chevron retained responsibility for
remediating pre-closing contamination on over 97% of the approximately 4,000
acres that comprise the Port Arthur Refinery. Clark agreed to assume
responsibility for any remediation that is required in the area within 25 to
100 feet of the active operating units (the ''Excluded Area''), including soil
and groundwater. The Excluded Area encompasses less than 100 acres of the
total Port Arthur Refinery site surface area.
Chevron will be obligated to remediate the contamination in the areas for
which it has retained responsibility as and when required by law, in accordance
with remediation plans negotiated by Chevron and the applicable federal or
state agencies. Clark has agreed to take no action with the intention of
accelerating or increasing Chevron's remediation obligations, and the time
period for such remediation is indefinite. Subject to certain exceptions,
Clark will generally assume liability for future action (including action
required as a result of a subsequent change in law) with respect to each of
over 20 geographic areas at the refinery when Chevron's remediation of that
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area is complete and upon acceptance by the appropriate regulatory authority.
Clark is responsible for all contamination arising after the closing of the
Acquisition (unless caused by Chevron).
The Port Arthur Refinery is not classified as a Superfund site under CERCLA,
is not on the National Priority List and is not listed as a State Superfund
site under the Texas Solid Waste Disposal Act (''SWDA''). In addition, the
Port Arthur Refinery is not in the CERCLIS database. The EPA's CERCLIS
(Comprehensive Response, Compensation and Liability System) database is a
comprehensive list of more than 35,000 identified potentially hazardous waste
sites nationwide that may require cleanup. CERCLIS sites that have achieved a
certain score using the EPA's Hazard Ranking System are eligible for the
Superfund National Priority List.
The future remediation of the Port Arthur Refinery is regulated according to
the provisions of the Resource Conservation and Recovery Act of 1977, as
amended (''RCRA''), SWDA and the Texas Water Code. The TNRCC has statutory
jurisdiction to implement SWDA and the Texas Water Code, and has been granted
authority by the EPA to implement the RCRA program. The remediation mechanisms
are a RCRA permit and administrative documents issued under State authority
which contain certain standards and schedules. A RCRA permit application has
been submitted to the TNRCC by Chevron but the permit has not yet been issued.
The facility will continue to operate under interim status until the permit is
issued. Evaluation of site contamination in the areas for which Chevron is
retaining responsibility has not been fully performed and is anticipated to be
addressed under the regulatory mechanisms addressed above.
In order to evaluate the nature and extent of the contamination in the
Excluded Area, Clark retained an environmental consulting firm (the ''Primary
Consultant'') with over 75 years of service to the refining industry, to
conduct a comprehensive subsurface evaluation. This evaluation was conducted
over a four-month period and included the collection of 115 surface soil
samples, completion of 315 geoprobe borings and the installation of 70 shallow
and eight deep groundwater monitoring wells. After analyzing the soil and
water samples from these sites, the Primary Consultant identified four areas of
potential concern: (1) sludge and soil in the pipe trenches; (2) free phase
hydrocarbons; (3) soil under the active operating process units; and (4)
groundwater.
As part of its evaluation, the Primary Consultant was asked to estimate the
costs of remediating the Excluded Area. In addition, Clark retained another
environmental consulting firm (the ''Review Consultant'') with over 15 years of
service to the refining industry, to independently evaluate and review the
remediation cost estimates based on the data accumulated. Based on the nature
and extent of the contamination found during the Primary Consultant 's
investigation of the Excluded Area, the experience of the consulting firms at
similar sites, and the level of cleanup that is likely to be required by the
regulatory authorities in the State of Texas, the consulting firms estimated
the likely costs of remediation in the Excluded Area. In making these
estimates, the Review Consultant relied upon information supplied to it by the
Primary Consultant, the Primary Consultant relied upon public information, and
both firms relied upon such other public and non-public sources as they deemed
necessary. In the opinion of the consulting firms, the assumptions and other
information provided in the following two paragraphs (that provide the basis
for the accompanying estimates) are reasonable, and the estimates themselves
are reasonable and reflect the most probable cost to be incurred by Clark in
remediating the Excluded Area.
Based on the findings of the Primary Consultant and the Review Consultant,
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Clark expects to begin in 1995 pipe trench remediation and the recovery of free
phase hydrocarbons. Based on the reports of the Primary Consultant and the
Review Consultant, Clark estimates expenditures of $0.7 million annually for
the next ten years for these remediation efforts. The pipe trench remediation
is expected to be performed by Clark in the Excluded Area in coordination with
Chevron's remediation of the other remaining areas of the Port Arthur Refinery.
The initial work to recover free phase hydrocarbons is expected to be
accomplished by converting the existing monitoring wells (drilled during the
subsurface investigation) to recovery wells. Based on the estimates of the
Primary Consultant and the Review Consultant, Clark will accrue approximately
$7.5 million as part of the Acquisition for the expected cost of these
remediation actions.
Due to the difficulty of remediating the soil and groundwater beneath the
active operating units and because of the nature of the subsurface geology,
which limits the movement of groundwater and free phase hydrocarbons beneath
the site, Clark and its consultants believe that, barring any operational
problems, such remediation is not likely to be required until the units are no
longer in operation. Therefore, Clark will not accrue any potential liability
related to the remediation of the groundwater or soil beneath the Excluded
Area. However, based on the consultant's cost estimates in the 1994 dollars,
remediation of groundwater and soil in the Excluded Area would be approximately
$27 million.
On November 8, 1994, Clark met with representatives of the TNRCC to discuss
Clark's proposed approach for remediating the Excluded Area. In a letter dated
November 10, 1994, the TNRCC advised Clark that, based on the information
provided by Clark, Clark's proposed approach for remediating the excluded areas
is ''appropriate and consistent with TNRCC rules and policies for operating
refineries.'' However, Clark has not presented, nor has TNRCC approved, a
detailed remediation plan, and the TNRCC retains the right to enforce all laws
and regulations that may be applicable to the refinery.
Actual remediation costs, as well as the timing of such costs, are dependent
on a number of factors over which Clark has little or no control, including
changes in applicable laws and regulations, priorities of regulatory officials,
interest from local citizens groups and development of new remediation methods.
There can be no assurance as to the timing, incurrence or the extent of actual
remediation costs. If total remediation costs significantly exceed estimated
costs, or if Clark is required to incur significant capital costs sooner than
anticipated, the cost of remediation in the Excluded Area could have a material
adverse effect on Clark's financial position and results of operations.
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Supply Agreements
Clark entered into supply agreements (the ''Supply Agreements'') with
Chevron (with respect to the PADC Facility) and with Chevron Chemical Company,
a subsidiary of Chevron (''CCC'') (with respect to the Chemicals Facility),
providing for the purchase and sale by Clark of various quantities of products
and commodities. Quantities to be purchased and sold may vary, being
determined in some cases by the output or requirements of a party and in some
cases by periodic negotiation. Prices will also vary, and in general will be
determined by reference to market indices, specific transactions involving
third parties, actual costs or periodic negotiation. Accordingly, it is not
possible to predict the dollar amount of such transactions or their impact on
Clark. However, Clark expects that the dollar amounts involved will be
significant. For example, if the Supply Agreements had been in effect for
1993, Clark estimates that Clark's total sales to Chevron and CCC would have
been approximately $440 million, and Clark's total purchases from Chevron and
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CCC would have been approximately $370 million, resulting in a net payment to
Clark of approximately $70 million. The actual amounts payable or receivable
by Clark may be greater or less than such amounts.
The Leases
Clark leased the Chemicals Facility and the PADC Facility (the ''Leased
Facilities'') to Chevron under two 99-year leases (the ''Leases''), with
nominal rental which was prepaid at closing. Each Lease provides that Chevron
may purchase a Leased Facility at the expiration of the Lease period or at any
time during the Lease term for a purchase price of $99. Chevron also has the
option to terminate either or both of the Leases at any time. On termination,
Clark may elect to convey the Leased Facility to Chevron.
Under the Chemicals Facility Lease, Clark agreed to pay to Chevron a fee of
$1 million per year. This fee is designed as partial compensation to Chevron
for Chevron's operation of the UDEX splitter and related units which are
beneficial to the Port Arthur Refinery and which CCC, the sublessee of the
Chemicals Facility, agreed to operate under the Supply Agreement for the
Chemicals Facility.
The Leases are net leases, under which Chevron is obligated to pay all
taxes, utilities and other costs of operating the Leased Facilities and for
obtaining all required permits. Chevron agreed to indemnify Clark against all
losses, damages and claims arising from Clark's ownership of the Leased
Facilities or Chevron's operation thereof, except to the extent that any such
loss, damage or claim arises from the gross negligence or willful misconduct of
Clark or its contractors or a breach by Clark of any express warranty or
agreement in the Leases or in the related Supply Agreement or Services
Agreement (as defined below). Chevron is responsible for all environmental
liabilities associated with the Leased Facilities.
Chevron may use the Leased Facilities for any lawful purpose not
inconsistent with its obligations under the Supply Agreements and the Services
Agreements. Chevron is permitted to make additions and to alter, modify,
remove or demolish any improvements, so long as any changes are consistent with
the purchase agreement, the Supply Agreements and the Services Agreements.
Chevron is not obligated to restore or replace any improvements following a
condemnation or casualty, and may retain any related insurance or condemnation
proceeds. Chevron is not obligated to return the Leased Facilities in any
specified condition at the end of the lease term.
Chevron must provide only such insurance as is substantially similar to that
maintained at its other similar facilities in the United States, and so long as
Chevron maintains a consolidated net worth of $300 million or more (indexed for
inflation), such insurance may consist of self-insurance.
In general, any assignment or sublease by Chevron (other than to an
affiliate of Chevron) of the Leased Facilities is subject to the rights of
first refusal described below and to the prior consent of Clark. Clark's
consent will not be unreasonably withheld. Clark agreed in the purchase
agreement to similar restrictions with respect to transfers of the Port Arthur
Refinery, as described below.
In connection with the Leases, Chevron and Clark entered into Reciprocal
Easement Agreements burdening the Port Arthur Refinery, the Chemicals Facility
and the PADC Facility, and providing for use by each party of the property
operated by the other for purposes of ingress and egress, installation,
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inspection, repair of utilities and other similar matters.
First Refusal Agreements; Restrictions on Transfer
At closing, Clark and Chevron entered into Agreements for Rights of First
Refusal (the ''First Refusal Agreements'') with respect to the Port Arthur
Refinery, the Chemicals Facility and the PADC Facility. The First Refusal
Agreements grant to each party the right to acquire any interest in the Port
Arthur Refinery, the Chemicals Facility or the PADC Facility on the terms of
any third party offer that the transferor desires to accept.
The First Refusal Agreements also provide that if at any time either Chevron
or Clark intends to abandon or permanently cease all or any part of its
operations at the Port Arthur Refinery, the Chemicals Facility or the PADC
Facility, such party shall first offer the facilities to be shut down or
abandoned to the other party for $100. The party receiving an offer with
respect to any abandonment or shutdown may elect to acquire the relevant assets
within 18 months of the offer, but must assume all environmental liabilities
associated with such assets (subject to certain exceptions in the case of
certain identified units at the Chemicals Facility).
In general, any transfer by Clark (other than to an affiliate of Clark) of
the Port Arthur Refinery is also subject to the prior consent of Chevron.
Chevron's consent will not be unreasonably withheld, and must be granted if the
transferee is organized under the laws of the United States or any State, has a
consolidated net worth of $300 million or more, has a good reputation for
integrity, competence and compliance with laws, and owns and operates a
refinery in the United States of reasonably similar complexity to the Port
Arthur Refinery. (Chevron has agreed in the Leases to similar restrictions with
respect to transfers of the Chemicals Facility and the PADC Facility.)
For purposes of the First Refusal Agreements and the purchase agreement, a
''transfer'' includes a direct or indirect change of control of any entity
(including Clark) that directly or indirectly controls the Port Arthur
Refinery, the Chemicals Facility or the PADC Facility, if at the time of such
change of control the book value of the Port Arthur Refinery, the Chemicals
Facility or the PADC Facility, as the case may be, represents 70% or more of
the total consolidated book value of the property, plant and equipment of the
entity subject to the change of control. A ''change of control'' under the
First Refusal Agreements means the acquisition by any person or group of 50% or
more of the common stock of any entity.
Services Agreements
Clark entered into services agreements (the ''Services Agreements'') with
Chevron (with respect to the PADC Facility) and with CCC (with respect to the
Chemicals Facility). The Services Agreements govern the provision by Clark and
CCC of various services related to the operation of the Chemicals Facility, the
PADC Facility and the Port Arthur Refinery, including electric, water, waste
treatment, gas, steam, communication, emergency response, security and other
services, all in accordance with standards specified in, and at rates
determined in accordance with, schedules to the Services Agreements.
Quantities to be provided may vary, being determined in most cases by the
output or requirements of a party. Prices will also vary, although in most
cases price will be determined on the basis of the cost incurred by the party
providing the service. Accordingly, it is not possible to predict the dollar
amount of such transactions or their impact on Clark. However, since in most
cases the price will be determined based on the cost of providing the service,
Clark does not expect that the aggregate impact of the Services Agreements will
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be material to Clark's results of operations.
Other Ancillary Agreements
Clark and Chevron also entered into various ancillary agreements. These
include, among others, an agreement regarding the use by Clark of certain
pipelines owned by affiliates of Chevron, an agreement between Clark and an
affiliate of Chevron for post-closing technology support services and an
agreement for the purchase by Chevron from Clark, at market prices, of 40,000
barrels per day of gasoline and 6,500 barrels per day of low sulfur diesel and
jet fuel from the date of the Acquisition.
SUMMARY OF COMPANY ESTIMATES REGARDING THE ACQUISITION
Introduction
Chevron historically operated the Port Arthur Refinery as part of its
worldwide production, refining and marketing system. As a result, operating
decisions for the Port Arthur Refinery may have been made to optimize the
performance of Chevron as a whole, taking into account Chevron's upstream
assets (oil exploration and production) and downstream assets (oil refining,
marketing and petrochemical operations). Clark's business is crude oil
refining, wholesale marketing of refined petroleum products and retail
marketing of gasoline and convenience products through its company-owned retail
network. Clark has no upstream operations. Historical financial information
covering Chevron's ownership of these assets would not be meaningful to an
understanding of Clark's proposed operation of the Port Arthur Refinery due to
the significant differences between Chevron and Clark in management philosophy,
refinery operations, personnel, supply, marketing and distribution, and other
activities anticipated by Clark.
The Acquisition represents the purchase of assets rather than a business.
The Port Arthur Refinery will be operated as an integral part of Clark's
refining divisions which includes two other refineries and 14 distribution
terminals. Clark has not acquired those attributes typically associated with a
business, such as the refinery's sources of crude oil and other feedstocks,
sales force, customer base or trade names. Clark has acquired only the assets
utilized in the manufacture of petroleum products at the Port Arthur Refinery
and has not acquired other operations of Chevron contiguous to the refinery,
including the petrochemical complex and lube oil distribution center. These
operations and the refinery have common utility and service facilities which
will continue to be shared by Clark and Chevron.
Company Estimates
Clark believes the Acquisition will provide the opportunity to improve
Clark's operating results and cash flow. Clark and an independent energy
consulting firm, have identified several operational and other productivity
improvements which are anticipated to be made with only limited capital
investment and which would bring the refinery up to comparable industry
processing rates and yields. Clark believes such productivity improvements, if
attained, will result in increased refining margins and decreased operating
expenses at the Port Arthur Refinery in the first year of Clark's operation.
Clark's estimates represent the operating results of the refinery as if Clark
had acquired the assets as of January 1, 1993 and operated it throughout the
year assuming the improvements which Clark plans to implement in 1995 were
implemented during 1993, and as if Clark had realized 1993 average market
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feedstock costs and refined product prices. Clark believes 1993 is appropriate
for comparison since it was the last full year for which operating information
for the Port Arthur Refinery was available, and operations and expenses were
not distorted by the impact of a major maintenance turnaround that occurred in
1994. In addition, Clark believes that information for periods prior to 1993
is not meaningful since the refinery was converted in late 1992 from a dual
train to a single train operation in order to achieve a substantial reduction
in operating costs, reducing the rated crude oil design capacity from what had
previously been over 400,000 barrels per day to approximately 178,500 barrels
per day.
Clark's estimates, set forth below, were developed in three parts. First,
earnings from base operations were estimated by using Chevron's actual 1993
crude, feedstock and finished product volumes in combination with actual 1993
U.S. Gulf Coast spot prices for crude and actual 1993 U.S. Gulf pipeline mean
prices for refined products. Second, a linear programming model of the
refinery was used to estimate the additional earnings which could be realized
by increasing crude runs and processing rates for the major downstream
conversion units. Consistent with industry practice, the linear programming
model included assumptions with respect to efficiency factors, downtime for
maintenance and other factors which occur in the actual operation of a
refinery. Third, estimates of operating expenses were made on the basis of
1993 information and adjusted to reflect significant differences in the
operations expected by Clark. See
'' Productivity Plan''.
Clark estimates for the Port Arthur Refinery included herein were not
prepared with a view toward compliance with published guidelines of the
American Institute of Certified Public Accountants or generally accepted
accounting principles and have neither been examined, reviewed nor compiled by
Clark's independent accountants and, accordingly, such independent accountants
do not express an opinion or any other form of assurance with respect thereto.
These figures represent Clark's best estimates of the operating and financial
results of the Port Arthur Refinery had Clark operated it in 1993 and assuming
that Clark had been successful in implementing its planned productivity
increases described below (the ''Productivity Plan''). Clark's estimates and
underlying assumptions, including the Productivity Plan, were independently
reviewed and confirmed by an independent energy consulting firm (''Energy
Consultant''). The Energy Consultant was furnished with the information
concerning the Port Arthur Refinery available to Clark, conducted a number of
site visits and discussed the operations of the Port Arthur Refinery with
Management of Chevron and Clark. Clark did not place any limitations upon the
Energy Consultant with respect to the procedures followed or factors considered
by the Energy Consultant in rendering its opinion. In the Energy Consultant's
opinion, the assumptions underlying Clark's estimates provide a reasonable
basis for Clark's estimates, and Clark's estimates are reasonable. The Energy
Consultant also evaluated the Port Arthur Refinery independent of its analysis
of Clark's estimates. The Energy Consultant has noted that Clark's estimates
are based on feedstock costs and refined product prices which existed on
average during 1993.
The success of Clark's Productivity Plan is subject to uncertainties and
contingencies beyond Clark's control and no assurance can be given that the
Productivity Plan will be effective or that the anticipated benefits from the
Productivity Plan would have been realized had Clark operated the Port Arthur
Refinery in 1993. The gross margin and operating expense estimates are based
on various assumptions including the Productivity Plan. Some of these
assumptions inevitably will not materialize. Other assumptions may materialize
but in a subsequent period. Unanticipated events and circumstances may occur
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subsequent to the date of this report. The actual results achieved by Clark at
the Port Arthur Refinery will vary from those set forth below and the
variations may be material. Consequently, the inclusion of the estimates
herein should not be regarded as a representation by Clark or any other person
that the estimates would have been achieved in 1993 or will be achieved in the
future. Prospective investors are cautioned not to place undue reliance on
these estimates.
Estimated 1993 Port Arthur Refinery Operating Cash Flow
Clark estimates that the combined refinery and terminal operation at the
Port Arthur Refinery in 1993 could have generated approximately $36 million of
operating cash flow without the benefit of any assumed improvements in
processing rates, yields or operating expenses. This estimate is based on (i)
1993 Gulf Coast spot market prices for crude oil and refined products, (ii)
actual 1993 production and yields and (iii) actual 1993 operating expenses
excluding certain unusual items.
In addition, Clark estimates the Productivity Plan could have reduced 1993
operating expenses by approximately $27 million. This reduction, combined with
other processing rate and yield benefits, in addition to the $36 million of
estimated operating cash flow before such improvements, could have resulted in
approximately $81 million in estimated 1993 operating cash flow from the Port
Arthur Refinery. Clark estimates that, using prices for crude oil and refined
products that existed in 1994, the total operating cash flow of the Port Arthur
Refinery would have been approximately $40 million.
The Energy Consultant independently reviewed Clark's estimates for the
refinery and terminal operations and Productivity Plan utilizing a linear
programming model based on standard industry processing rates and yields for a
refinery of the size and complexity comparable to the Port Arthur Refinery and
their own estimate of market prices for 1993. The Energy Consultant s analysis
indicated that Clark's underlying assumptions and Clark's estimates of
operating cash flow for the Port Arthur Refinery and related terminal
operations for 1993 are reasonable.
The Energy Consultant considers Clark's 1993 estimated operating cash flow
of $81.1 million to be within the Energy Consultant's estimates of operating
cash flow. Considering the complexity of estimating yields and due to the
differences in Clark's and Chevron's expected operation described above, Clark
and the Energy Consultant believe that there is reasonable agreement between
the two estimates. In addition, the following assumptions made by the Energy
Consultant in their estimates differ from those made by Clark: (i) the Energy
Consultant's refinery charges and yields were based entirely on linear
programming models, whereas Clark's estimates were based on actual Chevron
charges and yields and a linear programming model was used only to estimate the
results of the Productivity Plan; (ii) the Energy Consultant utilized six
readily available crude oil types and nine other feedstocks, whereas Clark
utilized those actually processed by Chevron in 1993 regardless of whether they
were optimal for the refinery; and (iii) the Energy Consultant assumed standard
industry rates for certain operating expenses whereas Clark utilized estimated
operating expenses.
Clark and the Energy Consultant believe that the estimated improvements in
the operation of the Port Arthur Refinery will make it comparable with that of
other refineries of similar size and complexity in the Gulf Coast.
Clark's estimates for the combined Port Arthur Refinery and terminal
<PAGE>
operations in 1993 are set forth below (in millions, except per barrel amounts):
<TABLE>
<S> <C>
1993
Estimate
Crude oil throughput(mbbls/day......... 189,700
Production(mbbls/day)................. 208,500
Refinery gross margin ($/bbl)......... $ 3.03
Refinery operating expenses($/bbl).... 2.11
Refinery gross margin................. $ 230.4
Refinery operating expenses............ 160.5
------
Refinery operating cash flow.......... 69.9
Pipeline and terminal operating
cash flow(1)....................... 11.2
------
Total operating cash flow............. $ 81.1(2)
=======
</TABLE>
(1) The pipelines and terminals of the Port Arthur Refinery are owned
and operated by a wholly-owned subsidiary of Clark.
(2) A $0.10 per barrel change in the realized gross margin or operating
expenses could have increased or decreased estimated operating cash flow by
$7.6 million. Clark estimates that, using prices for crude oil and refined
products that existed in 1994, the total operating cash flow of the Port Arthur
Refinery would have been approximately $40 million. A 1,000 barrel per day
change in refinery production could have increased or decreased estimated
operating cash flow by $1.2 million assuming gross margin stayed the same.
Summary of Company Estimate Assumptions
The assumptions underlying the anticipated improvements in processing rates,
yields and operating expenses are described below. The estimates assume that
(i) the Acquisition occurred at January 1, 1993; (ii) Clark successfully
implemented the planned improvements in processing rates, yields and operating
expenses; (iii) Chevron had assumed (pursuant to the purchase agreement)
principal responsibility for environmental remediation except under the active
operating units; and (iv) Clark invested approximately $20 million during 1993
for various projects to improve processing rates and yields.
In 1993 and 1994, Chevron invested approximately $160 million to convert the
refinery to a single train operation, improve operating practices and repair
operating problems during a scheduled maintenance turnaround and to construct a
waste water treatment facility. The benefits from these changes were not fully
realized in Clark's 1993 estimate.
Clark believes that the 1993 actual crude oil throughput rate averaged only
176,300 barrels per day due to limitations in the environmental permits. In
October 1994, Clark received an air permit from the TNRCC which provides that
<PAGE>
the capacity of the refinery can be increased to 250,000 barrels per day.
Clark intends to operate the refinery at approximately 200,000 barrels per day,
subject to market conditions.
Clark's 1993 estimate is based on Gulf Coast spot market refined product
prices. Other markets which can be accessed by the Port Arthur Refinery may
from time to time have higher spot market refined product prices, net of
transportation costs. Clark intends to take advantage of such product price
differentials when available.
Productivity Plan
Clark intends to implement a productivity plan designed to increase
processing rates, effect yield improvements and reduce operating expenses and
feedstock costs as compared to the estimated 1993 operating results. The
improvements consist of operating expense reductions of approximately $27
million and increases in processing rates and yields. In this regard, Clark
has assumed that (i) unit downtime would have been in line with industry
standards; (ii) necessary environmental permitting had been received and the
required capital expenditures had been made throughout the year; (iii) Clark
recognized no benefit for the refinery's ability to produce RFG; and (iv) low
sulfur diesel fuel was a mandated product for on-road use for all of 1993.
Processing Rate and Yield Increases
Crude unit. The Port Arthur Refinery's average crude oil throughput rate in
1993 was 176,300 barrels per day. The 1993 fourth quarter average was 188,000
barrels per day with the highest 1993 monthly rate at 199,000 barrels per day
during September 1993. However, Clark believes the processing rate was limited
due to environmental permit limitations. In May 1994, the Port Arthur Refinery
reached a processing rate of 207,000 barrels per day for several days following
a maintenance turnaround. Clark estimates that it could have achieved an
average operating rate of at least 189,700 barrels per day in 1993 if necessary
permits had been obtained. From May through November 1994, throughput rates
averaged 189,400 barrels per day with September throughput averaging more than
196,000 barrels per day. The estimated incremental crude oil processing rate
was expected to add $4 $6 million to 1993 operating cash flow.
FCC unit. The Port Arthur Refinery's average FCC unit throughput rate in
1993 was 58,200 barrels per day. However, excluding August 1993 when the unit
experienced unusual downtime, the average rate was 61,600 barrels per day. The
design capacity for the FCC is 70,000 barrels per day. From July through
November 1994, throughput rates averaged higher than Clark's estimated rate of
62,200 barrels per day. The completion of a project (with an estimated cost of
$2.5 million) to hydrotreat the coker gas oil prior to processing in the FCC
unit should enhance gasoline yield. Clark believes that the estimated
incremental FCC processing rate and improved yields would have added $5-$7
million to 1993 operating cash flow. This project will be completed only if
the current price differentials result in an attractive payout.
Continuous catalytic reformer (''CCR'') unit. The Port Arthur Refinery's
average CCR throughput rate in 1993 was 39,000 barrels per day; however, during
the last half of the year it was operated with deactivated catalyst which
caused unscheduled downtime and reduced processing rates. The rated capacity
of the unit is 48,000 barrels per day and normal industry operation of a CCR is
commonly at or in excess of the rated capacity. The catalyst was replaced
during the 1994 maintenance turnaround to address the operating problems. From
<PAGE>
the 1994 turnaround through November 1994, rates averaged 43,800 barrels per
day compared to Clark estimated rate of 45,000 barrels per day. Clark believes
that the estimated incremental CCR processing rate would have added $4-$5
million to 1993 operating cash flow.
Coker units. The coker units averaged a total throughput rate of 28,000
barrels per day in 1993 which was limited by unscheduled downtime which reduced
capacity by an estimated 3,000 barrels per day. Turnover of one-half of the
experienced personnel at the coker units contributed to this performance.
During 1992, the cokers were run at an average rate of 31,000 barrels per day.
Approximately $1.2 million was spent during the 1994 turnaround to improve
coker unit reliability. Clark intends to spend an additional $6 million to
install a coke deheading device assuming the current price differentials result
in an attractive return and improve instrumentation which is designed to
improve unit reliability and safety and increase Clark's ability to run heavy
sour crude oil. Clark estimates it could have achieved an average operating
rate of 34,200 barrels per day had the intended improvements been effected
during 1993. During September 1994, the actual throughput rate was 32,700
barrels per day. Clark believes that the estimated incremental coke processing
rate would have added $5-$7 million to 1993 operating cash flow.
Low sulfur diesel fuel production. Since the October 1, 1993 implementation
date requiring low sulfur diesel fuel for on-road use, the Port Arthur Refinery
has produced approximately 50,000 barrels per day of low sulfur diesel fuel
(100% of diesel production). Clark therefore estimates that if such
regulations were in place for the entire year it could have achieved an average
operating rate of 50,000 barrels per day in 1993.
Reformulated gasoline production. While the refinery will be able to
produce up to 55% summer and 75% winter southern grade reformulated gasoline
with a capital investment of $0.5 million to improve blending and logistics
capabilities, no benefit for this ability was included in Clark's estimates.
This project will be completed only if the current price differentials result
in an attractive payout.
Decreased feedstock costs. The Port Arthur Refinery has the present
capability to process 25,000 barrels per day of typically lower cost, heavy
sour crude oil. With limited capital investment, Clark estimates it can
increase the ability to process heavy sour crude oil from 25,000 to 35,000
barrels per day. This project will be completed only if the current price
differentials result in an attractive payout.
Yields
As a result of the projects described above and the use of MTBE to
manufacture reformulated gasoline, Clark estimates the yield of refined
products, as a percentage of total production, would have been as follows:
<TABLE>
<S> <C> <C>
1993 1993
Actual Estimate
Gasoline 39% 43%
Diesel fuel 20 24
Jet fuel 12 10
Petrochemical products 17 15
Other 12 8
==== ====
Total 100% 100%
<PAGE>
</TABLE>
Reduced Operating Expenses
Since 1990, the Port Arthur Refinery has made improvements in key industry
measurements of operating expense performance. Clark believes, and industry
studies indicate, that, based on six month data through June 1993 as compared
to data included in 1992 and 1990 industry studies, the refinery had improved
an average of two quartiles in the four key operating expense measurements
related to maintenance costs, personnel, energy use and overall operating
expenses. Clark intends to make further reductions in operating costs,
including staff and contract labor reductions, maintenance and environmental
expense, corporate overhead, property taxes and other costs with an annual
estimated impact of $27 million. Clark believes that the costs used in its
1993 estimates are at a level comparable with other U.S. refineries with
similar process units and facilities.
Optimized Capital Investment
From 1989 to 1994, Chevron invested approximately $450 million in capital
improvements at the Port Arthur Refinery. In addition, a major maintenance
turnaround of $25 million was completed in 1994. As a result of such
investments by Chevron, Clark does not anticipate making major maintenance
expenditures or capital expenditures in the near term. Clark estimates that
during the period from 1995 to 1998, capital expenditures at the Port Arthur
Refinery should average approximately $50 $60 million per year, including
wastewater and safety projects required to be completed under the purchase
agreement. It is anticipated that the capital expenditures will be allocated
approximately 40% to ongoing maintenance projects, 30% to environmental
projects and 30% to productivity improvement projects. This assumes that
market conditions support discretionary capital investment with an attractive
economic return, otherwise capital spending should average approximately $25-
$35 million per year. Clark intends to optimize capital investments made at
the Port Arthur Refinery by linking capital spending to cash flow generated by
the refinery. Based upon current industry conditions, Clark expects that
capital expenditures at the Port Arthur Refinery in 1995 will be approximately
$20 million. This is consistent with Clark's business strategy to link capital
investments to cash flow.
Other
Although Clark believes that the assumptions are reasonably based, no
assurance can be given that such assumptions will occur. Clark does not intend
to update or otherwise revise the estimates to reflect circumstances existing
after the date hereof to reflect the occurrence of unanticipated events, even
in the event that any or all of the assumptions are shown to be in error.
Furthermore, Clark does not intend to update or revise the estimates to reflect
changes in general economic or industry conditions. Clark's regular quarterly
and annual financial statements will be included in Clark's Quarterly Reports
on Form 10-Q and Annual Reports on Form 10-K, which will be filed with the
Securities and Exchange Commission. Information contained in such financial
statements will be deemed to supersede the estimates.
The estimates with respect to the Port Arthur Refinery are inherently
subject to significant business, economic, regulatory and competitive
uncertainties and contingencies beyond Clark's control, including significant
dependence on industry market conditions in the refining and marketing
business. No assurance can be given that the estimates would have been
realized in 1993 or that any of the assumptions will be realized in the future.
<PAGE>
In connection with the purchase of the Port Arthur Refinery, Clark and Clark
USA completed the following financing transactions:
<PAGE>
Purchase Financing
Revised Equity Capitalization
Clark USA amended its certificate of incorporation to authorize the
following four classes of common stock: Common Stock, par value $.01 per
share, of Clark USA (''Common Stock''); Class A Common Stock, par value $.01
per share, of Clark USA (''Class A Stock''); Class B Common Stock, par value
$.01 per share, of Clark USA (''Class B Stock''); and Class C Common Stock, par
value $.01 per share, of Clark USA (''Class C Stock''). Immediately following
the effectiveness of such amendment, the 65.33 shares of common stock of Clark
USA then outstanding were exchanged for 12,375,000 shares of Common Stock and
562,500 shares of Class B Stock. All such shares were owned Horsham and Clark
Holdings Limited, a wholly owned subsidiary of Horsham.
Dividends - Under the terms of Clark USA's certificate of incorporation, as
amended, the holders of Common Stock, Class A Stock, Class B Stock and Class C
Stock are, subject to the preferential rights, if any, of the holders of any
preferred stock, entitled to receive the same dividends or distributions per
share, whether payable in cash, in property, or in shares of capital stock, as
may be declared and paid on each other class of stock.
Voting Rights - At every annual or special meeting of stockholders of Clark
USA, the holders of every share of Common Stock and Class A Common Stock are
entitled to one vote per share and the holders of every share of Class B Stock
and Class C Stock are entitled to 1/10th of one vote per share, voting together
on all matters submitted to a vote of the stockholders of Clark USA, except as
otherwise required by law or agreement.
Conversion - The holder of any shares of Class A Common Stock shall have the
right, at any time or from time to time, to convert any or all of such holder's
shares of Class A Common Stock into an equal number of shares of Common Stock.
Five business days after final determination of Clark USA's 1995 EBITDA and
Clark USA's 1995 Net Income in accordance with the next succeeding paragraph,
the Class B Common Stock and the Class C Common Stock automatically shall be
converted as set forth below.
The ''Company's 1995 EBITDA'' shall be equal to Clark USA's earning before
interest, taxes, depreciation and amortization (as determined in accordance
with GAAP), as set forth in Clark USA's 1995 Financials, as adjusted as
provided in this subsection (c) and the ''Company's 1995 Net Income'' shall be
equal to Clark USA's net income (as determined in accordance with GAAP), as set
forth in the audited consolidated financial statements of Clark USA for the
calendar year 1995 (the ''Company's 1995 Financials''), as adjusted as provided
below. In calculating Clark USA's 1995 EBITDA and Clark USA's 1995 Net Income,
all items of expense shall be included. Notwithstanding the foregoing, in
calculating Clark USA's 1995 EBITDA and Clark USA's 1995 Net Income, (a) any
write-ups or write-downs of inventory (which shall be determined based on the
lower of cost or market value of Clark USA's raw materials, work in process,
supplies used in operations and finished goods, determined based on a last in,
first out (LIFO) basis), based on changes in the market prices of petroleum
feedstocks, blendstocks and refined products, (b) any nonrecurring events which
accrue profit to Clark USA (e.g., settlements of litigation), (c) any gains or
losses in Clark USA's portfolio of investment securities, (d) any book loss
(which does not affect cash flow) on Clark's diesel desulfurizer, (e) EBITDA
<PAGE>
and Net Income of any entities acquired by Clark USA after February 27, 1995
(unless a binding acquisition agreement relating thereto shall have been
entered into prior to such date), and (f) any items which artificially inflate
EBITDA or Net Income for calendar year 1995, shall be disregarded. In
determining the ''Company's 1995 EBITDA'' and the ''Company's 1995 Net Income''
1995 turnaround expenditures in excess of $4,000,000 shall be expensed rather
than capitalized, and such amounts in excess of $4,000,000 which are expensed
shall not be amortized.
Five days after Clark USA's 1995 EBITDA and Clark USA's 1995 Net Income are
finally determined, (the ''Conversion Date''), each share of the Class B Common
Stock and the Class C Common Stock shall be subject to a mandatory conversion
into the number of shares of Common Stock and the number of shares of Class A
Common Stock respectively as set forth under the Applicable Conversion Level.
The ''Applicable Conversion Level'' shall be the conversion level set forth in
the chart below (EBITDA and Net Income numbers being expressed in millions of
U.S. dollars) for the lower of Clark USA's 1995 EBITDA or Clark USA's 1995 Net
Income (e.g., if Clark USA's 1995 EBITDA is 160 (conversion level 2) and Clark
USA's 1995 Net Income is 47 (conversion level 4), the ''Applicable Conversion
Level'' will be conversion level 2).
<TABLE>
<S> <C> <C> <C> <C> <C>
Conversion Conversion
Ratio per Ratio per
share of share of
If AND Net Class B Class C
Conversion EBITDA Income into shares into shares Share
Level is: is: of Common of Common Price
1 < 158 < 32 0.0 2.0 $13.33
2 158-169 32-38 0.4 1.6 $13.64
3 170-181 39-46 0.8 1.2 $13.95
4 182-193 47-53 1.2 0.8 $14.29
5 194-205 54-60 1.6 0.4 $14.63
6 > 205 > 60 2.0 0.0 $15.00
</TABLE>
Liquidation - In the event of any voluntary or involuntary liquidation,
dissolution, or winding-up of the affairs of Clark USA (a ''Liquidation'') on
or prior to the Public Float Target Date (as defined below), the holders of
shares of Common Stock, Class A Common Stock and Class C Common Stock (which,
in the event of any Liquidation prior to the Conversion Date and for purposes
of distributing the Liquidation Proceeds, shall be assumed to have been
automatically converted into Class A Common Stock at a ratio of one share of
Class C Common Stock to two shares of Class A Common Stock) shall be entitled
to share ratably in the remaining assets of Clark USA available for
distribution after payment or provision for payment of the debts and other
liabilities of Clark USA and of the preferential amounts, if any, to which the
holders of Preferred Stock shall be entitled (the ''Liquidation Proceeds'');
provided that if the Liquidation Proceeds are less than the product of (i) the
total number of shares of Common Stock and Class A Common Stock (including the
number of shares of Class A Common Stock into which the Class C Common Stock
are deemed to be converted) entitled to share in the Liquidation Proceeds
multiplied by (ii) the Purchase Price (as defined below), then (a) first, the
holders of the Class A Common Stock (including the number of shares of Class A
Common Stock into which the Class C Common Stock are deemed to be converted)
shall have first priority with respect to the Liquidation Proceeds in an amount
<PAGE>
per share equal to the applicable Purchase Price and (b) then, the holders of
the Common Stock shall share ratably in any remaining Liquidation Proceeds.
In the event of any Liquidation after the Public Float Target Date, the
holders of shares of Common Stock, Class A Common Stock and Class C Common
Stock (which, in the event of any Liquidation prior to the Conversion Date and
for purposes of distributing the Liquidation Proceeds, shall be assumed to have
been automatically converted into Class A Common Stock at a ratio of one share
of Class C Common Stock to two shares of Class A Common Stock) shall be
entitled to share ratably in the Liquidation Proceeds.
''Public Float Target Date'' shall mean the first date following the initial
public offering of Common Stock on which the aggregate market value of the
Common Stock held by persons other than Tiger Management Corporation (''TMC''),
affiliates of TMC, Horsham, affiliates of Horsham and employees of Clark USA
exceeds $150 million.
The ''Purchase Price'' means, (a) if the Liquidation occurs prior to the
Conversion Date (as hereinafter defined), $13.33 per share and (b) if the
Liquidation occurs after the Conversion Date, the applicable Share Price as set
forth in the chart above.
Sale of Shares by Clark USA
On February 27, 1995, a wholly owned subsidiary of Horsham (''Newco'')
purchased 9,000,000 shares of Class A Stock and 563,250 shares of Class C Stock
from Clark USA for an aggregate consideration of $135 million. Such funds,
together with available cash of Clark USA and Clark, were used to fund the
purchase of the Port Arthur Refinery, associated terminals, pipelines and other
related assets, including inventory and spare parts.
In addition, Paul D. Melnuk, the President and Chief Executive Officer of
Clark USA and Clark purchased 33,333 shares of Class A Stock and 2,088 shares
of Class C Stock for an aggregate consideration of $500,000.
Resale of Shares to Tiger Management Corporation
On February 27, 1995, pursuant to a stock purchase agreement (the ''Stock
Purchase Agreement''), a copy of which is filed as an exhibit to this Current
Report on Form 8-K, between Clark USA, Newco, Horsham and TMC, Newco sold
8,000,000 shares of Class A Stock and 500,000 shares of Class C Stock
previously purchased from Clark USA to three funds managed by TMC (such funds
and TMC are referred to collectively as ''Purchasers'') for $120 million. The
shares of Class A Common Stock and Class C Stock represent between 35.6% and
40% (depending on the conversion ratio of the Class B Stock and Class C Stock)
of the total outstanding capital stock of Clark USA.
Limitation on Certain Transactions
Pursuant to the Stock Purchase Agreement, Clark USA agreed that, so long as
TMC and/or their affiliates collectively own 20% of the issued and outstanding
capital stock of Clark USA, the affirmative vote of the holders of a majority
of the outstanding shares of Class A Stock shall be required for any of the
following actions:
(a) acquisitions by Clark USA during any calendar year of
equity or debt securities (other than equity or debt securities purchased in
connection with Clark USA's investment of excess cash) or fixed assets (other
than pursuant to operating leases and other than as part of capital expenditure
<PAGE>
programs (whether or not requiring approval as contemplated by (c) below)) or
assumptions by Clark USA of liabilities which, in the aggregate, exceed
$10,000,000;
(b) other than certain identified financings, financings by
Clark USA (other than fully underwritten widely dispersed public offerings of
Common Stock or pursuant to working capital arrangements) during any calendar
year which in the aggregate exceed $10,000,000;
(c) during calendar year 1995, capital expenditures by
Clark USA which in the aggregate exceed $100,000,000 or, in any calendar year
thereafter, which in the aggregate exceed $120,000,000 for such year;
(d) any increase in any calendar year (in excess of the
Consumer Price Index increase from the previous calendar year) in compensation
payable at any time to any senior management member, and any termination of
employment by Clark USA, or significant reduction by Clark USA in duties, of
Paul Melnuk, the President and Chief Executive officer of Clark USA;
(e) other than a fully underwritten widely dispersed public
offering of Common Stock, any material change in the capital structure of Clark
USA (including, without limitation, any issuance of debt securities (except as
permitted by (b) above) or equity securities (other than the Management
Options);
(f) any transactions between Clark USA on the one hand and
any of its affiliates or Horsham or its affiliates on the other hand (other
than the Management Options) which (a) are not on reasonable arm's length terms
at fair market valuations or (b) during any calendar year exceed, in the
aggregate, $2,500,000;
(g) a merger or sale of Clark USA or more than 10% of its
assets; and
(h) prior to the second anniversary of the Public Float
Target Date, any acquisition by Clark USA which is funded by the issuance of
new equity securities of Clark USA.
In addition, so long as TMC and/or their affiliates own 20% of the issued
and outstanding capital stock of Clark USA, Clark USA may not, and shall cause
each of its subsidiary not to, engage in any business other than its current
business.
TMC Director
So long as TMC and/or its affiliates own 10% or more of the issued and
outstanding capital stock of Clark USA, at each annual election of the Board of
Directors of Clark USA thereafter, Clark USA will take all necessary action to
elect to the Board of Directors of Clark USA one person nominated by TMC.
Management Options
Pursuant to the Stock Purchase Agreement, Clark USA may issue to employees
options to purchase up to an aggregate of 1,250,000 shares of Common Stock at a
price of $15 and exercisable on or before February 27, 2005 (collectively, the
''Management Options''), subject to prior written approval of the option plan
by TMC.
Limitations on Sale of Capital Stock of Clark USA
<PAGE>
With respect to any public offering of Common Stock, Purchasers on the one
hand and Clark USA on the other hand may participate for the same number of
shares, and Horsham and its affiliates may participate (with respect only to
the Common Stock into which its Class A Stock is convertible) for a percentage
of the number of shares being offered by Purchasers which is equal to the
percentage that the Common Stock into which Horsham's Class A Stock is
convertible represents of the capital stock of Clark USA owned in the aggregate
by Purchasers; provided, however, that Clark USA shall have priority to the
extent that funding is required in connection with such offering for mandatory
redemption of Clark USA's Senior Secured Zero Coupon Notes due 2000, Series A.
Other than as provided in the preceding paragraph or with TMC's consent
(which TMC may grant or withhold in TMC's sole discretion), Horsham shall not
sell any equity securities of Clark USA owned by it (other than the Class A
Stock issued to Horsham hereunder or the Common Stock into which it is
convertible), provided, however, that Horsham may sell equity securities of
Clark USA after 120 days after Purchasers no longer own at least 10% of the
then issued and outstanding capital stock of Clark USA unless TMC shall at such
time be actively attempting to sell any capital stock or shall have taken
substantial steps in such regard.
If any Purchaser (a ''Selling Purchaser'') proposes to sell all or any
portion of its Class A Stock or its Class C Stock in a private sale to an
entity engaged in the refining industry (a ''Proposed Sale''), the Selling
Purchaser will provide Clark USA with at least 45 days' written notice prior to
the closing thereof (which closing shall be subject to Clark USA's right
hereunder), and Clark USA will have the right, prior to the date of such
closing (the ''Proposed Sale Closing Date''), to produce an alternative buyer
for the same number of shares at a higher price than in the Proposed Sale and
otherwise on terms (including the date of closing being no later than the
Proposed Sale Closing Date) equal or superior to the terms of the Proposed
Sale. If the transaction with such alternative buyer does not close for any
reason by the Proposed Sale Closing Date (other than by reason of a breach by
the Selling Purchaser of its obligations), the Selling Purchaser shall be free
during the next 90 days to sell the shares it proposed to sell in the Proposed
Sale to any buyer (including the buyer in the Proposed Sale). Notwithstanding
the above, Clark USA shall have the right, in its sole discretion, to prohibit
any sales of capital stock of Clark USA for a period of time not to exceed 90
days from (i) the date of the initial public offering (the ''IPO'') of Clark
USA's Common Stock if so required by the managing underwriters of the IPO or
(ii) the date of the notice referred to in the first sentence of this paragraph
in the event of a pending material transaction. In the event Clark USA shall
prohibit any sales of its capital stock of Clark USA pursuant to the preceding
sentence, the 90 day period during which the Selling Purchaser would have
otherwise been free to sell the shares it proposed to sell in the Proposed Sale
shall be extended to the date following expiration of such prohibition which is
the same number of days thereafter as the number of days during such 90-day
period that such prohibition was in effect.
Any executive officer of Clark USA exercising Management Options may not
sell equity securities of Clark USA issued upon exercise of our Management
Options until the earlier of four years after February 27, 1995 or 120 days
after Purchasers and their affiliates own less than 10% of the capital stock of
Clark USA and then only if Purchasers and their affiliates shall not at such
time be actively attempting to sell equity securities of Clark USA or have
taken substantial steps in such regard.
Registration Rights
<PAGE>
In connection with the execution of the Stock Purchase Agreement, Clark USA
entered into a registration rights agreement (the ''Registration Rights
Agreement'') with TMC, Newco and Paul D. Melnuk, a copy of which has been filed
as an exhibit to this Current Report on Form 8-K. In the Registration Rights
Agreement, Clark USA agreed, among other things, to provide the Purchasers with
demand and piggyback registration rights with respect to their shares of Class
C Stock and shares of Common Stock issuable upon conversion of their Class A
Stock (including shares of Class A Stock issuable upon conversion of shares of
Class C Stock). Clark USA also agreed to file a shelf registration and to use
its best efforts to cause the shelf registration to become effective not later
than the later of (i) 90 after consummation of the IPO and (ii) August 27, 1995
and to remain effective for a period of four years from the date upon which the
shelf registration is declared effective.
Clark USA Capital Contribution
Subsequent to the purchase financing transactions described above, Clark USA
contributed, in the form of additional equity, $150 million (consisting of the
equity offering proceeds and existing cash) to Clark for the purchase of the
Port Arthur refinery and related assets. These proceeds along with existing
cash at Clark were used by Clark to finance the transaction.
Working Capital Facility
Clark entered into a credit agreement (the ''Clark Credit Agreement'') with
a group of banks led by Bank of America NT&SA, as Administrative Agent
(collectively, the ''Lead Banks''). The Clark Credit Agreement provides for a
revolving credit facility, secured by all of Clark's current assets and certain
intangibles, which will terminate on December 31, 1997. The amount of the
facility is the lesser of $400 million or the amount available under a
borrowing base, as defined in the Clark Credit Agreement, representing
specified percentages of cash, investments, receivables, inventory and other
working capital items, with a sub-limit of $100 million for cash borrowings.
The facility available under the Clark Credit Agreement will be used on an
on-going basis for working capital purposes (primarily letter of credit
issuances) for the purchase of inventory and the financing of receivables,
including inventory and receivables associated with the Port Arthur Refinery.
The credit facility will initially be provided by the Lead Banks, but may later
be syndicated to a group of financial institutions (collectively the
''Lenders'').
Interest on principal drawn down under the Clark Credit Agreement will be at
a floating rate based, at Clark's option, either on the London Interbank
Offered Rate (''LIBOR'') or on a ''Base Rate'' equal to the higher of Bank of
America NT&SA's reference rate or the Federal Funds rate plus one-half percent.
The Clark Credit Agreement also provides for various financing fees, commitment
fees, letter of credit fees and other similar payments.
The Clark Credit Agreement contains covenants and conditions which, among
other things, limit dividends, indebtedness, liens, investments, contingent
obligations and capital expenditures, and require Clark to maintain its
property and insurance, to pay all taxes and comply with all laws, and to
provide periodic information and conduct periodic audits on behalf of the
Lenders. In addition, Clark is required to comply with certain financial
covenants, including: (i) maintenance of working capital of at least $160
million from the date of the Acquisition through June 29, 1995, $165 million
from June 30, 1995 through September 29, 1995 and $175 million thereafter; (ii)
<PAGE>
maintenance of a tangible net worth, as defined, of at least $255 million from
the date of the Acquisition through December 30, 1995, $275 million from
December 31, 1995 through December 30, 1996, $295 million from December 31,
1996 through December 30, 1997, and $325 million thereafter, each as adjusted
quarterly to give effect to a portion of future earnings or capital
contributions by Clark USA to Clark; (iii) a maximum indebtedness to tangible
net worth ratio, as defined, of 3.0 to 1.0, decreasing to a ratio of 2.75 to
1.0 on December 31, 1995 and 2.5 to 1.0 on March 31, 1996; (iv) a minimum ratio
of adjusted cash flow, as defined, to debt service, as defined, of 1.2 to 1.0
for the quarter ending June 30, 1995, 1.4 to 1.0 for the two consecutive
quarters ending September 30, 1995, 1.6 to 1.0 for the three consecutive
quarters ending December 31, 1995, 1.8 to 1.0 for the four consecutive quarters
ending March 31, 1996 and 2.0 to 1.0 for the four consecutive quarters any time
thereafter; and (v) maintenance of minimum balance sheet cash (as defined) of
at least $50 million.
Item 7. Exhibits
Exhibit 10.1 - Stock Purchase Agreement, dated February 27, 1995,
between The Horsham Corporation, 1096153 Ontario Limited, Clark USA, Inc. and
Tiger Management Corporation (Exhibit 10.1 filed with Clark USA Form 8-K, dated
February 27, 1995 (Commission file number 33-59144)
Exhibit 10.2 - Registration Rights Agreement, dated February 27,
1995, between 1096153 Ontario Limited, Clark USA, Inc., Tiger Management
Corporation and Paul D. Melnuk (Exhibit 10.2 filed with Clark USA Form 8-K,
dated February 27, 1995 (Commission file number 33-59144))
Exhibit 10.3 - Amended and Restated Asset Sale Agreement, dated as
of August 16, 1994, between Chevron U.S.A. Inc. and Clark Refining & Marketing,
Inc. (Exhibit 10.3 filed with Clark USA Form 8-K, dated February 27, 1995
(Commission file number 33-59144))
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 13, 1995 CLARK REFINING & MARKETING, INC.
By: /s/ Dennis R. Eichholz
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Dennis R. Eichholz
Controller and Treasurer
